Australia: Selling your business – make sure you get the details right

When you're selling your business, it can be a difficult and
emotional time. You have often spent many years building it,
investing in it and working long hours to make it profitable and
successful. A lawyer is helpful throughout the sales preparation
process and the actual sale – not only protecting you
legally, but also ensuring that all practical considerations are
taken into account and that you don't make decisions from an
emotional perspective.

There are many important issues that need to be considered when
selling your business, particularly in regard to ensuring that the
Contract for Sale of Business accurately reflects your agreement
with your buyer.

What does the process for selling your business look like?

There are typically four stages to a sale of business
transaction.

Offer: Receiving and accepting an offer from a
buyer

When you find a willing buyer, you will often receive from them
either a written letter or verbal offer. A written offer is always
preferable, as it will include the principal terms and minimise the
potential for confusion at a later stage. If you choose to accept
the offer, you should also accept it in writing, but importantly,
you should express that no legal obligations are to arise until a
formal Contract for Sale of Business is entered into by both
parties.

You should ensure that these early communications cover off
other important considerations for the business. These are outlined
in more detail later, but they principally concern matters such as
price, assets of the sale, transfer of employees, conditions
(financing and/or due diligence), training as part of the sale and
any restraints on competing.

Exchange: Ensuring the Contract for Sale of Business
accurately reflects your wishes

You should engage a lawyer once you have agreed to the principal
terms of the sale, as you will need to prepare a Contract for Sale
of Business. If you have already had a formal written offer and
acceptance, it will speed this part up, as a lot of the details of
the sale will already have been negotiated. A lawyer will ensure
that the contract accurately reflects your wishes regarding the
sale and can represent you in any further negotiations with the
purchaser or the purchaser's lawyers.

Once agreement is reached, the parties' lawyers will
finalise the Contract for Sale of Business and prepare it for
execution. The purchaser usually pays a deposit when the contract
is formally exchanged.

Settlement: Preparing for settlement and transferring
the assets of the business

Once the contract has been exchanged, you will need to commence
the process of readying for settlement, including transferring the
business's assets. The types of things you need to ensure are
ready to be transferred for use on and from the settlement date
include items such as:

Telecommunications

Client lists

Employee details

Leases, licenses and permits

Business names

Any security interests or other encumbrances against the
business or the business assets will need to be discharged or
released. If you have provided a personal guarantee in respect of
the lease of the business premises or any other continuing
contract, ideally you should seek a release on or before
settlement.

Post-settlement: Tidying things up

Once the business is sold, there will be a number of matters
that you need to attend to finalise the sales process. These may
include:

Registering transfers

Finalising tax returns, activity statements and instalment
notices

Cancelling your ABN and your business name (if
appropriate)

Important matters for you to consider when selling your
business

When you are negotiating the offer and the terms of sale with a
potential purchaser there are many important matters that you need
to consider and these will vary depending on the type of business
that you own. Outlined below are six legal considerations that need
to be taken into account for most businesses.

Apportioning the value of the business to plant,
equipment and goodwill

A business can be valued in a number of ways, however ultimately
the purchase price must be one which both parties agree to in order
to move forward with the sale. There is no one set method for
calculating a valuation, and you can use a combination of methods,
with some of the most common being estimation of future profits,
assessment of the value of the business's assets, or how much
you think the goodwill that your business has accumulated is
worth.

Once you have agreed on a valuation, it is necessary to
apportion it to plant, equipment or goodwill. Again, this is
dependent on the type of business you run – for example, for
a manufacturing business you would apportion a higher percentage to
plant or equipment than for an online business, where a higher
percentage is likely to be apportioned to goodwill. There are tax
consequences depending on how the purchase price is apportioned and
you should obtain advice from your accountant about this.

What are you actually selling when you are selling your
business?

A critical issue is what exactly is being included in the sale
of the business. Although this may seem self-evident, it is often a
cause of subsequent disputes.

Obviously, what is being included in the sale of a business is
highly dependent on the type of business you are selling. However,
some of the more important things that should be considered as part
of the sale include:

The business name, logo, website and contact details of the
business

Property, plant and equipment

Any agreements that the business is a party to, for example
leases or distribution agreements

Client information

Any other tangible or intangible items that are used in the
business operations

Buyer likely to require a restraint on competing to protect the
business

A restraint is a legal contract between you and the purchaser of
your business that prevents you from engaging in a similar business
to the business being sold. Its intention is to protect trade
secrets and proprietary information. It is important that
restraints should not be too restrictive, as they are only
enforceable by the courts if they are reasonable.

Restraints will generally refer to specific geographic areas
(e.g. within five kilometres of the business site) and/or be
time-based, referring to a specific period (e.g. 12 months from the
sale of the business).

Do your employees finish up or keep working for the new
owner?

When you sell your business, your employees will either transfer
with the business to the new owner, or conclude their employment.
The buyer may offer continued employment to the employees of the
business before settlement of the sale occurs. The terms and
conditions of the Contract for Sale of Business should also cover
this process.

If the employees transfer with the business, you need to provide
the new owner with the relevant employee information, including
their rights, entitlements, contracts and any other matters. These
need to be up to date before selling your business. The types of
records may include:

Leave – including annual leave, personal leave and long
service leave entitlements

Superannuation

Tax – including PAYG and FBT

Apprenticeship and traineeship agreements

Probation and training records

Performance reviews

WorkCover

Personal contact details

There are some employee entitlements that the new owner must
recognise and others that they do not have to recognise. The
Contract for Sale of Business should also address the process for
adjusting the employee entitlements for any transferring
employees.

Training of the new business owners as part of the
sale

It is relatively common practice in the sale of small businesses
that the buyer of a business will request that the seller stays on
after the sale to train the buyer and assist the new owners to get
up to speed with its operations. Typically, the period is not
lengthy – often being between seven and 28 days.

Taxation consequences of the sale

You should obtain advice from an accountant on the taxation
implications of the sale. Issues to be considered include GST
– with purchase price impacted by 10% if it is applicable
– and CGT, which may be applied fully, or you may be eligible
for a concession. As the tax consequences of the sale depend on how
the deal is structured, this should be a consideration before the
sale proceeds.

Businesses need to consider any terms in their contracts that could impose onerous terms on small business customers.

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